What is the FHA Limited 203(k) Renovation Loan?
A renovation mortgage finances both the purchase or refinance of a home, plus the cost of repairs, upgrades, or updates to the property, with one first mortgage loan. The FHA Limited 203(k) Rehabilitation Loan is intended for smaller scale projects that are not structural in nature.
This program can help a buyer or homeowner remodel a kitchen, change the flooring, or install an outdoor deck, adding to their own enjoyment of the home and adding to its value at the same time.
Limited 203(k) Mortgage Basics
- Cost of work cannot exceed $35,000. There are no minimum repair costs
- Eligible properties are attached and detached 1-2 unit primary residences that have been completed for at least one year, manufactured homes, and FHA approved condominiums
- The appraisal report must provide an “as completed” appraised value that estimates the value of the property after completion of the renovation work. Up to 110% of this after-improved value can be borrowed
- Must work with a General Contractor (licensed as required in the state/municipality of the home.) DIY projects are ineligible
- 10 year, 15 year, 20 year, 25 year, and 30 year term options
- Primary Residence Only
What are the benefits?
- Low Down Payment
- Provides the opportunity to finance a property and its renovation without putting a large amount down. For a purchase transaction the down payment requirement can be as low as 3.5% and for a rate and term refinance the equity position as low as 2.25%
- No minimum repair cost
- Finance just the cost of the desired or necessary projects. No need to expand the plans to meet a minimum cost requirement
- Refinance options available
- Not strictly a purchase program, the FHA Limited 203(k) Rehabilitation Loan can be an great option for homeowners looking to finance a minor remodel of an existing property
Who is eligible for an FHA Limited 203(k) Renovation Loan?
This program is to be used to renovate an existing property, not build a new construction home. The home must have been completed at least one year before the case number assignment date for the new 203(k) loan to qualify.
Eligibility will be determined by examining the borrowers’ income, assets, liabilities, and credit history and score, as well as the market value and condition of the property to be financed.
- Total rehabilitation cost must not exceed $35,000, unless property is in a Qualified Opportunity Zone (QOZ); Properties located in Qualified Opportunity Zones (QOZ) may have total renovation and repair costs up to $50K
- Only one General Contractor may be used
- Work must begin within 30 days of the execution of the Agreement
- Work must be completed within six months, or the time period dictated in the Agreement, whichever is shorter
- The amount borrowed must be within FHA loan limits which vary by county and are higher in parts of the country where real estate is more expensive
- 600 minimum FICO score
Projects must only include allowable improvements. Some examples include:
- Repair/Replacement of roofs, gutters and downspouts
- Repair/Replacement/upgrade of existing HVAC systems
- Repair/Replacement/Upgrade of plumbing and electrical systems
- Repair/Replacement of flooring
- Minor remodeling, such as kitchens, which does not involve structural repairs
- Painting, both exterior and interior
- Weatherization, including storm window and doors, insulation, weather stripping etc.
- Purchase and installation of appliances, including free-standing ranges, refrigerators, washers/dryers, dishwashers and microwave ovens
- Accessibility improvements for persons with disabilities
- Lead-based paint stabilization or abatement of lead-based paint hazards
- Repair/replace/add exterior decks, patios, porches
- Basement finishing and remodeling, which does not involve structural repairs
- Basement waterproofing
- Window and door replacements and exterior wall re-siding
Some improvements aren’t approved for ﬁnancing through an FHA Limited 203(k) loan, such as:
- Structural modifications
- Repair, removal, or remediation of oil tanks
- Repair or installation of private water systems (wells)
- Repair or installation of private waste management systems (septic systems, lagoons, cesspools, pits, etc.)
- Mold remediation
In which scenarios is the FHA Limited 203(k) Renovation Loan a good option?
When a major home repair is needed it’s not always possible to come up with the funds to pay for it all at once. Credit cards, second mortgages, personal loans, or contractor financing can be costly, especially when compared to a low rate first mortgage. A homeowner wanting to fix up a home for sale, to improve the appearance of the property, or to make necessary repairs to keep the home safe and well maintained can refinance into an FHA Limited 203(k) mortgage to cover the costs and keep interest rate payments low.
In a market with low inventory home buyers can find themselves facing stiff competition when trying to find a home that meets their needs. When receiving multiple offers sellers aren’t generally inclined to make major concessions should an inspection report list a few crucial repairs. An FHA Limited 203(k) home loan can open up the market, allowing house hunters to consider homes that could use some updating and improvements knowing they have financing to pay for it at their disposal.
Buying a Home with a Limited 203(k) Mortgage
When purchasing a property with a Limited 203(k) home loan, details on the projects to be completed, including information on the general contractor, are evaluated with the other documentation during the underwriting phase. The contractor can be paid an advance at closing, prior to beginning the work, and then receive two draws following closing for the balance of the payment.
Limited 203(k) Renovation Home Loan Refinancing
The FHA Limited 203(k) Renovation Loan can also be used to refinance an existing mortgage. Homeowners who feel their home no longer meets their needs may find some updates and upgrades help them fall in love with the property all over again – at a fraction of the cost of moving.
Other Programs to Explore
If the FHA Limited 203(k) Mortgage does not work for a scenario perhaps one of these programs will be a better option:
- For larger scale renovation projects, including those with structural updates: FHA Standard 203(k) Loan
- To finance luxury projects such as installing a pool or outdoor kitchen: Fannie Mae HomeStyle® Renovation Mortgage
- For qualifying military personal, a no money down renovation option: VA Renovation Loan